In June 2017 the European Commission published draft legislation containing new rules for tax-planning intermediaries who design or promote cross-border tax planning arrangements. The stated objective is to identify and assess schemes that are potentially facilitating tax evasion or avoidance in order to block harmful arrangements in the early stages.
The proposals require intermediaries to report details of any arrangement that features defined ‘hallmarks’ (outlined below) to their own tax authority within five days, beginning on the day after the arrangement was made available to the taxpayer.
The new proposals are an amendment to the Directive for Administration Cooperation (DAC) and will be submitted to the European Parliament for consultation and subsequent adoption. It is anticipated that they will take effect on 1 January 2019.
‘Intermediaries’ has a wide definition within the proposals and is described as anyone ‘designing, marketing, organizing or managing the implementation of the tax aspects of a reportable cross-border arrangement, or series of such arrangements, in the course of providing services relating to taxation.’
An intermediary could be a company or professional, including lawyers, tax and financial advisors, accountants, banks and consultants. An advisor who deals with any type of direct tax such as income, corporate, capital gains, inheritance tax, etc, will fall into the reporting remit.
A tax-planning arrangement will be considered reportable if it features a ‘hallmark’ that is defined within the Directive, and the onus will be on the intermediary to report it. These hallmarks are considered to be characteristics within a transaction that may enable the arrangement to be used to avoid or evade paying taxes.
If one of more of the following hallmarks is identified then the arrangement must be reported:
- A cross-border payment to a recipient in a no-tax country.
- Involvement with a jurisdiction with weak or insufficient anti-money laundering legislation.
- An arrangement set up to avoid reporting income in accordance with EU transparency rules.
- An arrangement set up to circumvent EU exchange requirements for tax rulings.
- If it has a direct correlation between the fee charged by the intermediary and the amount that the taxpayer will save in tax avoidance.
- If it ensures that the same assets benefit from depreciation rules in more than one country.
- If it allows the same income to benefit from tax relief in more than one jurisdiction.
- If it does not respect EU or international transfer pricing guidelines.
The Member State in which the arrangement is reported must automatically share the information with all other Member States via a centralised database on a quarterly basis. The information needs to be completed using a standard format, which will require details of the intermediary, the taxpayer and the scheme being recommended. Member States are obliged to implement proper penalties if intermediaries fail to adhere to the reporting requirements, and each Member State has to enforce its own national sanctions.
Some Member States already have mandatory reporting requirements in place for intermediaries, such as the UK, Ireland and Portugal. The reporting requirements are designed to assist Member States in closing loopholes when it comes to tax abuse as well as deterring the use of aggressive tax planning schemes across the EU.
STEP will continue to monitor developments in relation to these new measures, and will inform members of any new information as soon as it is released.
Emily Deane TEP is STEP Technical Counsel